Getting The Better Of Home Loan Options

While applying for home loan, one question that trouble most people is to decide whether to choose a fixed rate interest or a flexible one. The former remains fixed, while the latter will go up or down depending mainly on inflation. For example, if I choose the 7.5% fixed rat e offered, and it went down to 5% in a year, you will feel sorry. On the other hand, if rates went up to 10% or more, you will still be paying a bargain 7.5%.

Most borrowers prefer the fixed rate because they will always know what they will be paying, even though the floating loan started at a lower rate of interest. However, home loans do not have to be just fixed or floating. The two can be combined with the amount you borrow divided into two parts; one with a fixed rate of interest; and the remainder flexible. The fixed rate segment helps you overcome interest rate increase. And if interest rates fall, the flexible rate decreases too enabling you to save money. Besides, you also get the advantage of getting lower flexible rate from the beginning.

But keep in mind that even with a fixed rate, the lender can impose a higher rate after a certain period in the event of unpredictably high inflation. Hence, it is important to read all the fine prints and ask questions before you put your signature on the dotted line. Also, look for penalty clauses. If there are provisions for penalties, discuss with the lender to reduce or even remove some of them. If you find the interest rates are uncomfortably higher try taking a loan against your deposits. This is same as borrowing from your own non-liquid assets. Your fixed deposits may be earning around 7% or so. You can profitably use this fund to get a loan and save on interest by paying may be just 2% more interest.

Home loans can be insured, so that the borrowers dependents are protected from liability in case you are unable to repay due to death, accidents, illness or loss of job. The lender can recommend an agent, or better still, or find an insurance company yourself and take a policy for the entire loan duration. If anything happens to you, the insurance company will pay the rest of the loan. You can also consider switching the loan if interest rates go down by a few percentage points in the financial market. Switching is taking a fresh loan after closing your old one from the same lender by paying a small fee. Switching could also involve changing from a fixed to a floating rate, or vice-versa.

The fees for switching a flexible rate to a fixed one are higher than doing the other way. You can also consider repaying in advance wholly or partially in one lump-sum amount or in installments. This will enable you to not only to lower your principal loan period and considerably reduce the total interest amount you will pay. Most lenders are agreeable to this idea, and are ready to waive any penalty if you talk to them.

Another strategy is to go for refinancing by taking a new loan from another lender offering a lower rate and use the money to pay off your old lender. But refinancing is costlier than switching, since it will mean paying closing penalties on the first loan. But, you will still gain, if the new interest rate is substantially lower. For example, by moving from a lender charging 12% to a new lender offering 9.5% will help you save considerably on the interest rates. Additionally, you can negotiate to either lengthen or shorten your loans tenure, whichever is suitable as dictated by your circumstances.

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